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Big Government, Congressman Ryan, and Student Loans

Alan Collinge has appeared here several times with posts on the student loan crisis. He just sent me a new contribution with his commentary on the Republican budget proposal as it relates to student loans. I don’t agree with his analysis, but if I had to agree with all of my guest posters all of the time, I would have to write all the posts myself and I have a day job to tend to. It is a great job. This time of year, we get free dinner Monday through Thursday, free lunch on Saturday and free coffee all the time. It does cut into my blogging time though.

One would think that behind the scenes, Republicans are hard at work developing smaller government initiatives in response to overwhelming populist demand, and in keeping with their stated beliefs. Digging into the higher education related elements of Congressman Ryan’s budget, however, reveals something quite different. In fact, it appears that Ryan’s intention with higher ed is to grow government, and grow it significantly. This is couched in a so called “fair value” accounting scheme applied to the federal student loan program that can only be described as a lie to the American people, and a big, fat, painful lie at that.

Here’s the situation: a couple of years ago, President Obama overhauled the nation’s student loan program whereby the lending and guarantor functions (previously performed by the private sector) were taken over by the federal government.

So, the old, “Federal Family Education Loan Program” (FFELP) was subsumed by the federal government. Remember, now, this was lending system that allowed Sallie Mae’s stock price to rise more quickly than Microsoft‘s when that stock was on fire. This was a lending system that garnered Sallie Mae CEO enough cash to make a tender offer on a major league baseball team, and even build his own, private, 18-hole golf course just outside Washington D.C. It is also the lending system that supported an extremely rich network of guaranty agencies, who thrived on penalties and fees attached to defaulted loans.

The old, FFELP system was also extremely lucrative because of subsidies. Interest subsidies paid to the lenders while students were in school, and also when their student loans were in deferment. There were also very lucrative spread subsidies, and other subsidies paid by the federal government to guarantors for various reasons.

Under Obama’s new, Direct loan program, all of this money now goes to the federal government. The Department of Education now makes every nickel of interest (and charges students even more than the FFELP loans did), makes all the money the guarantors previously made on penalty and fee income derived from defaulted student loans (and the fed was already making $1.22 for every dollar paid out on defaulted FFELP loans). The Fed also no longer pays any of the subsidies mentioned above.

So, to say that the federal government is losing money, not making it (and a ton of it) on the new, Direct Loan program would be beyond incredible. It would be a lie.

Yet, this is precisely what the beltway crowd are now claiming, because Congressman Ryan is proposing a change in the Republican budget that uses a new, “fair value” accounting method- which counts money not made by the lending program if it were to charging supposedly “market rates” for it’s loans to borrowers- as a loss! According to “experts” like Jason Delisle at the New America Foundation who is defending the Republican proposal, the lending system is, indeed losing money overall, and this accounting change reflects that.

This is beyond belief and credibility, and raises obvious concerns. First, there is no way on God’s green earth that the new lending system isn’t making money, and a large amount of it. This big, nasty government program thrives not only on interest income and elimination of subsidy payments, but also on the predatory underpinnings of the program, like the absence of bankruptcy protections, statutes of limitations, and the presence of draconian collection powers that make defaulted loans more profitable than healthy ones. Where the lenders and guarantors were making “mad” money under the old program, the federal government is making even more under the new program. No one looking you straight in the eye could disagree with this unless they were lying to your face.

Second, and perhaps most importantly: Why on earth are the Republicans buddying up with big-government champions like the New America Foundation in trying to protect this obvious, shameless, beltway monstrosity? Is this what the rank and file conservative Republicans can expect from their leadership in the House going forward? If so, I recommend strongly that they be immediately replaced, by true conservatives not infected by the bureaucratic, beltway sickness that seems to have enveloped both parties on this issue and others.

If the Republicans, particularly the younger ones on the Hill like Paul Ryan aren’t there to battle government largess, waste, and intrusion into the lives of decent citizens -both rich and poor- what are they good for?

I have two thoughts on Alan’s analysis. One is that to the extent Sallie Mae was profitable due to subsidies from the federal government, its profitability drops out of the equation. You can’t argue that the federal government will be as profitable as Sallie and will come out even further ahead because there are no longer subsidies to pay. More to the point scoring the loans as an expenditure, when you mark them to market will make it harder to make more of them, which might help with tuition inflation. Applying the principle of accounting conservatism (which has nothing to do with political conservatism), the proposal actually seems sound. Hopefully, Allan will weigh in and set me straight.

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One of the many misconceptions about the federal student loan program relates to interest rates on the loans. The interst rate on our son’s loan is 7.9% . (William O. Ford Federal Direct Loan Program) When fixing the national home mortgage crisis in vogue in D.C., mortgage lenders charging 7.9% were targeted and the rhetoric for change and justice from the White House and Congress was a daily fixture. As I look at the form 1098-E sent from the Department of Education the D.C. disconnect is loud and clear. Whle the student loan crisis is decried as the next national financial meltdown, no honest solutions are offered. Institiutions of higher learning are complicit in the looming crisis. While every university president bemoans cuts in funding and warns of declines across the board, the institutional nonprofit management style of the system is unchallenged. When the topic is occasionally raised, then university will trot out the ususal list of painful cuts to faculty and facilities which amount to bailing with a dixie cup. In the early 1970′s a year at Washington State University cost about $3,000, including beer and pizza money. It was possible for a student to make enough money in the summer to pay for the entire year’s costs. A student needed to make $6.50 an hour. In 2011 costs at W.S.U. are about $19,000. The student needs to make $40.00 per hour to reach the goal. That equates to an $80,000 per year job. It seems painfully clear we haven’t begun talking about the underlying cancer in the higher education system.

The piece that got me started on this topic http://www.forbes.com/sites/peterjreilly/2011/10/07/occupy-wall-street-lets-have-a-student-loan-bailout-but-we-need-to-march-on-the-colleges/ included reflections like that. I proposed that we fund a student loan bailout with an excise tax on university endowments.

To some extent the rising relative cost of college is to be expected. Productivity gains in other areas raise living standards. Industries that do not increase productivity will become relaitively more expensive as they need to compete for people. I doubt that is much of the problem though. In addtion many of the tools of some types of education have become dirt cheap. Most of the books worth reading are available for free on google now. You can listen to lectures from “the best classrooms in the world” from the Teaching Company for less than a hundred bucks. In many cases the high price is being paid for the credentials. My proposal would allow students to have their credentials marked to market or to sell them back to the colleges for their loan balances.

I agree. The sticker price is the core problem to be solved. See my earlier articles (particularly my most recent piece before this one). It is quite interesting to see how the removal of consumer protections from the loans that finance higher ed directly enable the inflation that you correctly illustrate.

There is no excuse for tuition rising at 3 times the rate of inflation…none. This is greed, plain and simple. Tuition will continue to rise as long as people are kept as endentured servants via loss of bankruptcy protections.

Lets face it.. Income based repayment is NOT an option.. First of all the word income is not defined in any one of the 50 titles that make up the Federal Statutes at large. The US Supreme court said that congress cannot define a word that is used in the Constitution. Therefore I ask you, how can you participate in something that no one can define?

Now lets look at what congress has done about student loans. Not much except remove all consumer protections and empowered themselves with collections powers that make a mobster envious. Personally I would rather deal with the IRS than student loans.

Congress could fix the default problem IF they would just give up a little Greed and control. Pass a law that mandates that a specific percentage (lets say 5 percent) of any payment made, goes to paying off principal, and you will get defaulters who gave up trying decades ago, start making payments. And limit this program to people who are in default for at least 5 years before entering the program.

Any one with half a brain can see the benefit, especially after reading Jeff Hills comment about how much one would have to earn, if they wanted to work their way thru college, the way it used to be possible to do.

Bottom Line: it is in the hands of congress.. They will decide our nations future. A future with hope, or a future with yet another generation in perpetual debt.

1. The obvious fix, firstly, is the return of bankruptcy and other consumer protections that would force the Department of Education (with Congress) to crack the whip on the schools to provide high quality at a low cost. I could see all manner of repayment programs that actually work (like what you propose) coming forth in the presence of bankruptcy protections, but not until then. See the gainful employment fiasco if you need any proof that nothing will work without the correct fiscal motivations being in play. Bankruptcy will correct that overnight, and we would see dramatic and significant improvements in both price and quality shortly thereafter.

2. The “bottom line”, in my view, isn’t that Congress is the only entity that can solve this problem, or perpetuate it onto future generations. Rather, it is that Congress can solve this problem currently, but very soon, this won’t be the case because the citizens will simply reject the validity of all student loan debt, en masse. We are far closer to reaching this point today than I would have imagined even three years ago. Today, I would say it is imminent.

The sad fact about all of the repayment programs as they now currently stand, is that the Department of Education, still perversely incented to want borrowers to drop out of the program, behaves accordingly. Other private, earned benefits such as this (ie interest rate reduction for ontime payments, etc) have a success rate of about 15%. I see no reason to believe that the success rates of these repayment programs will be any different.

And remember, interest continues to capitalize throughout the lifetime of these repayment programs, so that people dropping out, getting kicked out, or otherwise exiting the program will be stuck with a mammoth balance upon exit. This is what happens when there are no bankruptcy or other consumer protections.

All education has has ceased for some time now to develop and employ new processes and procedures and worst of all more productive educational methods. The real problem here is the government got involved in education and the financing of it. By the 1960s we needed more people with higher educations and proceeded to offer student loans and increased what grants were available. Well, guess what, that drove demand and as demand increased, just about anybody can get a college education these days, and believe it or not ptrices went up, but were mitigated by state support and endowments, until economic upset eliminated many of those supports. Pretty much, we got what we paid for.

All I ask is that bankruptcy protection and statute of limitations be reinstated. This country was built on the foundation of getting a second chance. People came here to escape the robber barons … to get a fresh start … and until ’05 every American had the right to start over when their debt burden became too onerous. For those kids (and their guarantors) who cannot get a decent paying job, and who have no hope of ever being able to pay off that school loan, is it too much to ask that they be given a second chance? Even the IRS understands when someone is unable to pay, puts people in “uncollectable” status, and writes off the debt in bankruptcy. Can’t Sallie Mae be held to the same standards? Honestly?